TJX Companies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter (13 weeks) ended November 2, 2013; year-to-date covers 39 weeks. Comparisons are to the quarter ended October 27, 2012 and the corresponding 39-week period. Results are unaudited. TJX operates off-price apparel and home-fashions retailers across Marmaxx, HomeGoods, TJX Canada and TJX Europe; Sierra Trading Post is included in Marmaxx.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | 39 weeks FY2014 | 39 weeks FY2013 |
|---|---|---|---|---|
| Net sales | $6.982 billion | $6.411 billion | $19.614 billion | $18.155 billion |
| Income before taxes | $879.4 million | $748.5 million | $2.384 billion | $2.113 billion |
| Net income | $622.7 million | $461.6 million | $1.555 billion | $1.302 billion |
| Diluted EPS | $0.86 | $0.62 | $2.14 | $1.73 |
| Pre-tax margin | 12.6% | 11.7% | 12.2% | 11.6% |
| Effective tax rate | 29.2% | 38.3% | 34.8% | 38.4% |
- Quarterly sales rose 9%; comparable-store sales increased 5%, driven by higher average ticket and customer traffic. Year-to-date sales rose 8%, with comparable-store sales up 3%.
- Cost of sales improved by 0.5 percentage points to 70.7% of sales in Q3 and 71.1% year to date, mainly from stronger merchandise margins and occupancy-cost leverage. SG&A was 16.6% of sales in both periods year to date; the quarterly ratio improved 0.4 percentage points.
- Quarterly diluted EPS increased 39%; year-to-date diluted EPS increased 24%. Share repurchases reduced weighted-average diluted shares by about 3% in both comparisons.
- Segment performance was mixed: Q3 sales and profit growth were broad-based. HomeGoods delivered 10% comparable sales growth and a 13.1% segment margin; TJX Europe posted 5% comparable sales growth and a 10.4% margin. TJX Canada’s margin eased to 16.4%; Marmaxx’s margin rose to 14.7%.
Cash flow, balance sheet and capital allocation
- Operating cash flow for the 39 weeks was $1.633 billion, down from $2.080 billion. The filing attributes the decline chiefly to inventory and related payables, timing of rent and tax payments, and payment of prior-year incentive compensation. Inventory changes net of payables used $237 million of cash, versus a $70 million source a year earlier.
- Property additions were $759 million; investing cash outflow was $785 million. Cash and cash equivalents were $2.011 billion, and short-term investments were $251 million at November 2, 2013.
- Current assets were $6.624 billion against current liabilities of $4.044 billion. Long-term debt was $1.274 billion, up from $774.6 million at fiscal year-end, following issuance of $500 million of 2.50% ten-year notes in May. No amounts were drawn on two $500 million revolving credit facilities.
- Financing cash outflow was $618 million, including $998 million of stock repurchases and $291 million of dividends paid; debt issuance provided approximately $500 million. TJX repurchased 19.7 million shares for approximately $1.0 billion year to date. A $1.5 billion repurchase authorization had approximately $1.425 billion remaining at quarter-end.
- Approximately 51% of cash was held outside the U.S.; $351 million was in countries where TJX intended to indefinitely reinvest undistributed earnings. Management stated existing cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year.
Outlook, commentary and risks
- Management expected fiscal 2014 capital spending of approximately $925 million to $950 million and planned total fiscal-year share repurchases of approximately $1.4 billion to $1.5 billion. The filing provides no specific earnings or sales guidance.
- About $80 million of Q3 tax benefits—primarily a state tax settlement-related reduction in uncertain-tax reserves and reversal of a foreign valuation allowance—lowered the quarterly effective tax rate by 8.9 percentage points and added $0.11 to EPS. The filing describes this as a benefit to both quarterly and year-to-date results.
- Management cited a challenging retail environment and uncertain economic conditions, while reporting strong comparable sales and earnings growth. Key disclosed risks include consumer demand and trends, competition, inventory execution, expansion, labor costs, technology and data security, weather and disruption, foreign exchange, commodity costs, litigation, taxes and regulatory changes.
- The former-operations reserve was $36.2 million; TJX estimated most would be paid over the next three years. The company may also be contingently liable on certain leases of former businesses not included in the reserve because management considered the likelihood of liability remote.
- Foreign currency, diesel fuel and merchandise-purchase hedges expose results to market movements; hedge mark-to-market changes can affect reported cost of sales and margins. Management reported no material change in its primary market-risk exposures.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of EPS growth reflects the approximately $0.11-per-share tax benefit and share repurchases, versus underlying operating performance.
- Whether comparable-sales momentum and margin improvements persist, particularly in Canada and Europe, and how e-commerce investments affect margins.
- Whether operating cash flow recovers as inventory, payables and tax-payment timing normalize; assess the planned capital spending alongside repurchases and dividends.
- Debt terms, future interest costs, liquidity needs and the timing or amount of planned share repurchases.
- Potential changes in tax reserves, former-operations lease obligations, and currency or fuel hedge impacts.